Medtronic lowers sales outlook for the year amid pandemic's persisting impact

Medtronic is rebounding slightly slower than expected from the pandemic as COVID-19 cases continue to dampen demand for many of its medical devices.

The medtech giant reported Tuesday a higher profit on lower revenue than Wall Street predicted for its fiscal 2022 second quarter.

Its net profit of $1.4 billion marked a 168% increase over a year ago when Medtronic and nearly every other medical technology firm was still reeling from the sudden loss of business brought on by the pandemic's unwelcome presence.

"This time last year we were faced with some significant issues from COVID which took our profit down a bit," Karen Parkhill, Medtronic's CFO, said in an interview.

Despite delivering $1.32 earnings per share, topping the consensus estimate of $1.29, investors traded the stock down 3% on Tuesday.

That's because revenue gains of 2.6% were lower than expected, spurring the company to lower its full-year guidance to 7-8% growth, down one to two percentage points from its previous guidance. Company executives cited greater-than-expected challenges due to the ongoing pandemic and health care staffing shortages.

Medtronic chief executive Geoff Martha sought to reassure market watchers.

"The underlying health of our business is strong and getting stronger. The majority of our businesses are winning [market] share," Martha said on a morning conference call with investment analysts. "We're off schedule, but we're not off track."

The company posted the greatest weaknesses in its domestic business. Sales declined in every U.S. unit while its emerging global markets posted robust growth for the three months that ended Oct. 29.

Unlike the first quarter, "the full force of the surge" related to the delta variant showed up in Medtronic's second quarter results, Debbie Wang, an analyst with Morningstar, wrote in a note.

"Considering the persistent flareups in viral transmission in certain geographic areas, despite concerted efforts at vaccination, we're not optimistic that procedure volume will display a sharp bounceback (this year)," Wang wrote. "Instead, we anticipate a more gradual increase over time."

Medtronic's U.S. neuroscience businesses saw an 8.1% drop in sales; but that category was up 35.3% in emerging markets. Similarly, medical surgical revenue was down 0.2% in the U.S. but up 28.8% in emerging markets.

The company's emerging markets include China, the Middle East and Africa, Latin America, Eastern Europe and Russia, South Asia and Southeast Asia.

U.S. hospitals continue to allocate large portions of capacity and resources to battling COVID-19. This has led to high staff turnover and lower rates of elective surgeries, such as those that use Medtronic technology.

Martha said that medical staffing issues in the U.S. were the unexpected curveball that affected second quarter results.

"When it was just COVID, that was tough enough," Martha said in an interview. "But now you've got, in the U.S. in particular, this nursing shortage. That's where the fluidity is. In our second quarter that's the thing that caught us a little bit by surprise — the severity of this nursing shortage and its direct impact on our cases ... We don't see that as much outside the U.S."

Executives say that they are encouraged by the monthly sales trends that they're seeing.

"Our monthly trends to continue to improve: September better than August, October better than September," said Parkhill. "If we look in November, the first three weeks ... our trends have continued to improve. We're hopeful that things are stabilizing or getting better."

Medtronic, which has its operational headquarters in Fridley, did not waver in its profit outlook, reiterating its full-year EPS guidance at $5.65 to $5.75. The company has more than 90,000 employees across the globe with approximately 11,000 in the Twin Cities.

Martha said Medtronic has seen a 50% increase in applicants to work at the company over the past year.

"It's been building up ... we made some changes to the company and created what I would like to think is a more entrepreneurial environment," said Martha. "Coming out of the pandemic, I think it's a great time to be at the intersection of health care and technology."

The company has boosted its annual research and development budget 10% to $2.7 billion for this fiscal year and has 250 clinical trials in progress, Martha said.